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Gold Prices Volatile, Bleed on QE2 Announcement

Gold prices are volatile and bleeding Wednesday afternoon as investors digest the Fed's announcement on quantitative easing Wednesday after two days of meetings.
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(Gold story updated with price changes and analyst commentary)
NEW YORK (TheStreet) -- Gold prices were volatile and bleeding Wednesday afternoon as investors digested the Fed's quantitative easing announcement Wednesday after two days of meetings.

The FOMC (Federal Open Market Committee) announcement that took place at 2:15 p.m eastern time Wednesday afternoon and revealed the Fed's decision to purchase up to $600 billion in long-term Treasuries until the end of June 2011, vs. the $500 billion that the market was expecting.

"The volatility may continue as there were reasons for profit taking, and sell stops in the market were based on sell the news," said George Gero Vice President, Global Futures, RBC Capital Markets.

Meanwhile, Kitco analyst Jon Nadler said the Fed move was clearly not the "big QE2 transoceanic luxury cruise ship that the plethora of large gold bettors had anticipated (and exhibited in the markets) over the past two or three months. It was also not the trigger for the demise (again) of the U.S. dollar. What happens down the road remains a tad on the foggy side, but the immediate effect of the Fed news fell well short of the expected gold price fireworks."

He added that the Fed's lack of a mention of buying mortgage-backed securities, and the fact that the QE2 program was only eight months long vs. the originally expected six months "likely rattled many an overly long (commodities) and short (the buck) speculator," he said in a note.

Gold for December delivery was falling by $24.40 to $1,332.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Wednesday has traded as high $1,364.80 and as low as $1,327.10.

Though gold stayed in the red after the Fed announcement, EverBank World Markets vice president Chris Gaffney noted that gold was paring some losses after the initial sell off. "I think the reason gold got hit so hard was that the Fed's larger QE convinced traders that the FED sees no near term inflationary pressures," he said. "In fact, they are more worried about a deflationary environment taking hold which would mean there is less need to purchase gold which is typically seen as an inflationary hedge."

The

U.S. dollar index

was stronger by 0.3% to $76.91, while the euro was flat at $1.40 against the dollar. The spot gold prices were falling by more than $12, according to Kitco's gold index.

Before the Fed announcement, EverBank World Markets' Gaffney said in a daily note that the dollar could find further support if more than one Federal Reserve policy maker objected to resuming the asset purchases. During the meetings, the president of the Federal Reserve Bank of Kansas City, Thomas Hoenig, spoke against the additional securities purchases, saying that it outweighed the benefits; the continued high level of monetary accommodation would destabilize the economy sooner or later, he said.

Earlier gold for December delivery was up about $5 and the spot gold prices were up more than $3. Gold prices reversed action and headed for negative territory after the ADP employment report, published at 8:15 am eastern time, turned out better than expected.

The report said the private sector added 43,000 jobs in October, beating the consensus expectation for gains of 20,000, according to Briefing.com, and vs. job losses of 2000 in September. Improving employment news was beneficial to the dollar but hurtful to gold.

George Gero Vice President, Global Futures, RBC Capital Markets attributed the earlier price action to short covering ahead of the Fed meeting results Wednesday. He expected to see some paring of gains and book squaring until the U.S. midterm elections were completely over.

Adrian Ash of BullionVault.com wouldn't be surprised if gold popped back up again. "Whether the Fed goes for 11 or 12 zeroes on its quantitative easing today, the dollar looks further than ever from paying a positive real rate of interest. Call it a speculative bubble if you like, but the bid for natural resources will only grow stronger as cash continues to lose value. The long-term case for rare, indestructible gold is very much intact," he said.

Silver prices

were down 71 cents to $24.13, while copper prices were falling 7 cents to $3.77.

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Gold mining stocks

, a risky but profitable way to

buy gold

, were trading in the red Wednesday afternoon.

Newmont Mining

(NEM)

was falling 2% to $58.71, while

Kinross Gold

(KGC)

was losing 0.9% to $17.79.

Agnico-Eagle Mines

(AEM)

was surrendering 1.7% to $75.85 and

Yamana Gold

(AUY)

was falling 2.3% to $10.79.

SPDR Gold Trust (ETF)

(GLD)

was down 1.4% to $130.65 and

Market Vectors Junior Gold Miners ETF

(GDXJ)

was falling 0.5% to $36.58.

-- Written by Andrea Tse in New York.

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